Chips are down for Macau casinos amid Hong Kong protests, slowdown in mainland China

MACAU, Sep 4, 2019, SCMP. The immediate outlook for Macau’s casino sector looks grim, after gross gaming revenue fell 8.6 per cent in August – its biggest monthly drop since June 2016 – from US$3.3 billion in August 2018 to US$3 billion, according to the Macau Gaming Inspection and Coordination Bureau, reported the South China Morning Post.

And the forthcoming Golden Week Holiday, which starts October 1, could point to how the rest of 2019 will pan out for the sector, said Andrew Chung, an analyst covering the gaming sector for Japanese investment bank Daiwa Securities.

“If the gross gaming revenue doesn’t hold up [during Golden Week], the China slowdown might be worse than everyone thought,” Chung said, adding that Daiwa was forecasting September’s gross gaming revenue to climb 3 per cent.

“If the gross gaming revenue holds up, we could be seeing flat to low single-digit growth for the rest of the year.”

He said long-term investors in Macau gaming stocks might take comfort in the growth of infrastructure, such as the Hong Kong-Zhuhai-Macau Bridge, which opened in October last year and made Hong Kong International Airport a “local” airport for Macau. Such infrastructure brings more visitors, which closely correlates to mass-market gaming revenue.

Macau’s tourism numbers, closely associated with mass gaming revenue, enjoyed 20 per cent growth between January and July this year over 2018, with 23.8 million visitors coming to Macau. Just over 3.5 million people arrived the mega bridge. Arrivals by ferry, on the other hand, dropped 36.5 per cent to four million during the same period.

The remainder of this year could be worrisome for casinos, especially if the Hong Kong protests continue.

“Although the tourism numbers were still strong in July, it is evident that growth has been contracting since June 19 [when protests started] and contracted further in July, when the movement intensified.

Hence, we believe we will see further contraction in August, when the official visitation data comes out,” said Chung, adding that disruption at Hong Kong’s airport will certainly have hurt the August numbers.

Analysts at Japanese financial holding company Nomura Holdings also said gaming revenue growth would return to mid single digits in September through to November, if there were no further disruptions at Hong Kong’s airport, in a research note on Tuesday.

The Macau Pataca gained 3.5 per cent against the Yuan in August, and Chung said this might have also dampened gaming revenue. The Pataca is fixed to the Hong Kong Dollar, which trades in a narrow band against the US dollar. On August 23, the Chinese Yuan fell to an 11-year low against the US Dollar. Further devaluation could hurt Macau’s gross revenue figures. Year to date, its gross gaming revenue is down 1.9 per cent, year on year, from US$25 billion to US$24.5 billion.

Macau’s six casino companies have reported mixed results for the first half of 2019. Venerable operator SJM, owned by Stanley Ho and his extended family, reported a decline in total group revenue from US$2.19 billion to US$2.17 billion. Its VIP gaming segment was hit hardest, dropping 25.1 per cent to US$956 million. The segment accounted for 36.5 per cent of SJM’s total gross gaming revenue, compared with 45.2 per cent last year.

Wynn Macau’s casino revenue fell by just under 1 per cent to US$2.1 billion in first half of 2019. Net revenue for Galaxy Entertainment Group was down 7 per cent in the same period.

The VIP segment’s contribution at MGM China rose 10.5 per cent in the first half to HK$4.9 billion (US$624.9 million), while the overall casino revenue rose 21.8 per cent to US$1.67 billion. Melco reported an increase in its total revenue from US$2.52 billion to US$2.85 billion, which the company attributed to growth in mass gaming.

Sands China reported net revenue of US$4.47 billion for the first half, an increase of 4.8 per cent over 2018, while its net profit rose 9 per cent to US$1.07 billion. The operator has aggressively promoted its non-gaming and premium mass gaming activities compared with its VIP segment.

The Hong Kong share prices of all six operators are, however, drastically down from year-to-date highs, which for five of them came in April or early May. SJM shares are down 32.2 per cent since a high of HK$10.62 on May 2. Wynn Macau shares are off about 34 per cent since a high of HK$23.1 on April 29. The average fall in share prices among all six operators is just more than 26 per cent since their springtime highs.

Nomura analysts put buy ratings on Melco and MGM China, citing gains in market share.

The VIP segment, once a dominant source of revenue for Macau casinos, has been steadily declining in importance since 2013. In 2012, the it accounted for US$26.7 billion – about 70 per cent of all gaming revenue. The segment accounted for just under half of all gaming revenue in 2019. So far, it is off by 13.5 per cent for the year.

Nomura analysts said the shutdown of proxy betting in the Philippines and Cambodia might lure some VIP play back to Macau, but investors “should not expect any near-term recovery in the VIP [segment]”.

Additional challenges to Macau’s VIP sector might now come from new casinos opening up in Southeast Asia, which might offer more opportunities for Chinese high rollers to gamble with less oversight. Suncity Group, the dominant VIP junket operator in Macau, has stated that its Hoiana casino in Vietnam will open in the fourth quarter this year, or the first quarter of 2020.

Suncity said Phase 1 of Hoiana will comprise more than 1,000 hotel rooms and a casino with 140 tables. SJM’s flagship casino, the Grand Lisboa, has 270 tables. For casino operators such as SJM, which are still heavily dependent on VIP betting, this could spell further trouble.